FEATURE STORY

Indonesia Economic Quarterly, July 2015: Slower Gains

July 8, 2015


Constraints prompt slower than expected gains from policy, but increased spending on priority infrastructure, and sustained revenue and investment climate reform, can boost growth.

World Bank Group

  • Growth is forecasted at 4.7 percent for 2015, revised down from the previous forecast of 5.2 percent, as  real output growth slowed to 4.7% year-on-year in the first quarter of 2015, the slowest pace since 2009.
  • Subdued fixed investment and more recently weaker consumer spending growth are lowering GDP growth in Indonesia. However, Indonesia is still growing faster than other countries that export commodities to China, such as Brazil and South Africa.
  • Fixed investment contributed 1.4 percent to GDP growth year-on-year in the first quarter of 2015 – or half its average annual contribution in 2010-12. Consumer spending grew by only 4.7 percent year on year in the first quarter, compared to an average growth rate of 5.3 percent last year. Private consumption accounts for 55 percent of total GDP expenditure and weighs heavily on growth.
  • Weaker growth has led to slower job creation, with recent employment rising just enough to absorb the increase in working age population.
  • Indonesia is in a good position to respond. It can raise deficit spending while containing the fiscal deficit to within the legal limit of 3 percent of GDP, in order to boost spending on priority infrastructure.  On the revenue side, the government has already introduced important measures, such as electronic tax return submission and improvements in the income tax audit strategy. Further measures are required for a sustained increase in revenue collection. Revenue was targeted by the Budget to increase by 30 percent but fell 1.3 percent in 2015 through May.
  • Slower economic growth, as well as lower global oil prices, helped narrow the current account deficit to 1.8% of GDP in the first quarter. Trade data for April and May show a further decline in imports - unusual for the months before Ramadhan.
  • Despite slower credit growth, weaker economic activity, and unchanged gasoline and diesel prices since March, inflation has accelerated in recent months, exceeding 7% year on year in May and June. A broad-based rise in food prices is the main cause of higher consumer prices.
  • Fixed investment growth is expected to increase in the second half of the year, but by less than previously projected, owing to lower than expected public capital spending and associated crowding-in of private investment.
  • The main risks to the outlook, stemming from persistently lower commodity prices and tighter credit conditions, are firmly to the downside. Weaker terms of trade continue to put pressure on corporate profits and household incomes, and hence domestic demand.
  • This edition of the Indonesia Economic Quarterly also discusses the sustainability of Indonesia’s current account deficit, and how to make fuel subsidy reform sustainable. In addition it goes into depth on the country’s tremendous geothermal energy potential and the need for a more conducive regulatory environment to harness it. And finally the report takes stock of Indonesia’s school grants program (BOS), which has helped provide operational funds to 220,000 primary and junior secondary schools since its inception ten years ago.
 

More analysis related to this edition of the IEQ is contained in: